The fallout in the subprime mortgage industry continues to trouble the stock market, and analysts expect the issue to be at the forefront of investor concerns next week.
A high level of subprime delinquencies reported this week and problems at subprime lenders rippled through the market. Some analysts worry a meltdown in the subprime market could spread to the broader banking industry and throughout the housing market.
Most economists in a survey by WSJ.com said subprime turmoil is likely to spread to the broader market, but they predicted the U.S. would avoid a recession.
"I think the main thing next week is the market's obvious concern about subprime and the housing market," Peter Boockvar, Equity Strategist at Miller Tabak, told CNBC.com.
"Recent economic data has reignited the feeling of inflation lurking in the background, but the overriding worry is the focus on the subprime," said Robert Stovall, Managing Director & Global Strategist at Wood Asset Management. "We will continue to see if there are more casualties coming along."
"The people who insure you against loss were willing to do it at a very low cost," Michael Metz, Chief Investment Strategist at Oppenheimer, told CNBC. "Now that you have the subprime problem, which I think is the tip of the iceberg, credit quality generally will deteriorate and the availability of money to marginal lenders will disappear. I think it's a major negative factor."
Housing and the Fed
Analysts expect much of the focus next week to be on the slowdown in the housing market. There will be plenty of data to sift through, including the National Association of Home Builders Housing Index, housing starts and existing home sales.
Investors will also pay close attention to comments from the Federal Reserve. The FOMC begins a two-day meeting on Tuesday and will announce its decision on interest rates on Wednesday.
"I expect both the stock and the bond market will quiet down going into the meeting, but then all eyes will be on the Fed's announcement," said Frederic Dickson, chief market strategist at D.A. Davidson & Company.
"We'll certainly want to see if the Fed has any intentions of doing anything about the subprime mortgage issue," Steve Chapman, vice president of Weiss Capital Management told CNBC.com. "We're looking for comments that may suggest they will take a different tack in dealing with that issue."
Most analysts agree the Fed will hold steady on interest rates.
Invest with Caution
Analysts suggest investors use caution while the markets try to gauge the fallout from the subprime meltdown.
"I would be lightening up on stocks," said Miller Tabak's Boockvar. "I believe the subprime problems will spread to other areas of the economy and affect the housing market and eventually impact the consumer."
"Just hold tight in cash," said Stovall. "You're getting 4+% in money funds. Bottom fishing is dangerous. You don't want to commit your money to equities right now."
Analysts who see buying opportunities in this market are still advising investors to be choosy.
"I think the market being down 6% or so is a good opportunity," Steve Goldman, chief market strategist at Weeden & Company, told CNBC.com. "Investors will be rewarded if they buy on these dips. I still like the materials and the cyclical stocks. They were leaders before the pullback, and I think they will continue to lead."
"We're staying on the defensive," said Dickson. "We see some fairly significant opportunities for some of the large-cap tech growth stocks that people have hated for the last couple of years such as Intel and Oracle . Another area would be the boring global consumer companies, because they have consistent earnings strength, such as Pepsi and Proctor & Gamble." Dickson does not own any of those recommended companies and D.A. Davidson has no investment banking relationship with them.
"We're seeing opportunities to buy quality companies at more attractive prices," said Larry Coats, co-manager of the Oaks Value Fund. The fund's portfolio includes Berkshire Hathaway , Cadbury Schweppes and Capital One . "Look for very good businesses with clean balance sheets, trading at good valuations. Tell people to keep the faith."